After a late summer lull, the European debt crisis has been re-ignited with violent anti-austerity riots in Spain and Greece, spooking investors and driving down markets around the world.

A demonstrator is taken away by a riot policeman Tuesday night after a protest against spending cuts and the government of Mariano Rajoy ended in riots around the Spanish parliament in Madrid, Spain.
Jasper Juinen/Getty Images

After a brief respite, the European debt crisis has been re-ignited with violent anti-austerity riots in Spain and Greece, spooking investors and driving down stock markets around the world.

“We are coming out of the summer lull and we are reaching the point where tough decisions will have to be made,” said Martin Schwerdtfeger, senior economist at TD Economics.

“That’s why pressure is building up again,’

The Bank of Spain cautioned Wednesday that the country’s economy is in a deep recession and continues to shrink “significantly.” The warning came the day after 6,000 protestors converged on the national Parliament in Madrid, where they clashed with police.

In Greece, about 50,000 people took part in an anti-government rally in Athens. Riot police used tear gas and pepper spray against several hundred demonstrators when the march turned violent.

The stark images sent markets around the world tumbling on Wednesday.

At the start of September, investors basked in optimism after European Central Bank President Mario Draghi vowed to buy sovereign debt in secondary markets. A few weeks later, U.S. Federal Reserve chair Ben Bernanke offered another soothing balm by confirming a third round of quantitative easing to juice the U.S. recovery.

“Reality has bitten back hard as markets have once again woken up to the political and economic realities of the policies being pursued in Europe,” Michael Hewson, senior market analyst at CMC Markets U.K. wrote in a research note.

“Images of tear gas and rioting protestors on TV screens don't generally engender confidence in investors that EU leaders have control of the situation in Europe.”

Spain’s unemployment rate has hit 25 per cent – 50 per cent for young people – as the government, like in Greece, cuts jobs, salaries, pensions, and benefits as it struggles to meet targets designed to slash its deficit.

Spain Recoils as its Hungry Forage Trash Bins for Next Meals, a headline in the New York Times screamed this week. The story explained that the local government in Girona, in northeast Spain, has announced plans to put locks on the garbage bins to stop people from searching for food in them.

Spain’s leaders are expected to present a new batch of economically painful reforms on Thursday when it unveils a draft budget for 2013.

On Friday, an auditor will release the results of stress tests on Spanish banks hit hard by the collapse of the country’s real estate sector, which drove economic growth until the 2008 financial crisis hit.

The government will then judge how much of a 100 billion euro loan it will tap to help bail out the banks. Initial estimates say the banks will need some 60 billion euros.

Spain is also under pressure from investors to apply for European Central Bank assistance in order to keep its borrowing costs down.

But Spanish Prime Minister Mariano Rajoy has yet to say whether Madrid will apply for the aid, knowing that such assistance comes with conditions.

“These events serve to remind everyone that there is an economic and political dimension to the crisis, but there is also a social dimension. People are suffering,” said Patrick Leblond, associate professor at the Graduate School of Public and International Affairs at the University of Ottawa

“It’s a reminder to politicians that if you stretch the rubber band too far, it will break.”

In the coming weeks, Greece’s foreign lenders will have to decide whether to grant the ailing country more time to abide by the targets of its bailout program.

That will have repercussions for Portugal, where the economy is also deteriorating, Schwerdtfeger said. “Every time they contemplate modifying the program, that requires more funding. That has to come from somewhere.”

With files from the Star’s wire services

More on thestar.com

We value respectful and thoughtful discussion. Readers are encouraged to flag comments that fail to meet the standards outlined in our
Community Code of Conduct.
For further information, including our legal guidelines, please see our full website
Terms and Conditions.